The use of Health Savings Accounts (HSAs) has grown dramatically, increasing by over 500% since 2013, according to the Consumer Financial Protection Bureau.¹ This surge reflects the growing importance of saving for healthcare expenses. Yet Empower research shows that just half of people (50%) say they understand what an HSA is, with more Gen Xers (57%) and fewer Gen Zers (40%) familiar with the option.

An HSA account offers a way to set aside money for medical costs, which can make it easier to manage healthcare now and in the future.² An HSA account can serve as both a savings and investment tool, providing tax advantages and flexibility. It allows consumers to pay for qualified medical expenses while setting aside funds for future healthcare needs.²

What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a special savings account designed to cover medical expenses. It allows individuals with high-deductible health plans (HDHPs) to contribute pre-tax dollars toward healthcare.³

You can use the money in an HSA for various qualified healthcare expenses. Any unused funds remain in the account from year to year, potentially growing through contributions and if you decide to invest the assets once you reach a certain account balance.²

Health Savings Account benefits extend beyond covering current medical needs. It offers the flexibility to potentially grow funds tax-free, providing financial relief for future healthcare costs.² Using an HSA for medical expenses during retirement can offer one pathway on the journey to financial security.

Benefits of an HSA account

HSAs can provide valuable benefits, making them a powerful tool for managing healthcare expenses. With tax efficiency and long-term growth opportunities, they can serve as one component in any well-rounded financial strategy.

Using HSA for medical expenses

One of the greatest advantages of an HSA account is the ability to use the funds for a wide range of qualified medical expenses. This flexibility allows individuals to cover essential healthcare costs without dipping into their regular income.¹

These eligible expenses can include:⁴

• Doctor visits and medical procedures
• Prescription medications
• Dental and vision care
• Health-related equipment such as eyeglasses, hearing aids, and insulin pumps

People can help lower their out-of-pocket costs by using HSA funds for these medical expenses while enjoying tax-free withdrawals.

Triple tax advantage^*

The triple tax advantage of an HSA account makes it one of the most tax-efficient savings tools available²:

• Tax-free contributions: Contributions made to your HSA can reduce your taxable income, offering immediate tax savings
• Tax-free investment growth: Any potential interest, dividends, or investment gains within the HSA account grow tax-free
• Tax-free withdrawals: When used for qualified medical expenses, withdrawals from the HSA are not subject to income tax

^*Contributions, any earnings, and withdrawals are federal income tax-free if used to pay for qualified medical expenses. State income taxes may still apply. HSA funds used for nonqualified medical expenses may be subject to applicable federal and state income taxes and/or penalties.

These combined tax benefits can make HSAs an attractive choice for individuals looking to reduce their healthcare expenses while working to grow their savings.

Long-Term Growth Potential

Funds in an HSA account can grow over time and be invested in stocks, bonds, and mutual funds, allowing account holders to work toward building wealth while saving for medical expenses. The ability to invest HSA funds is a unique feature that distinguishes it from other healthcare savings tools.

Investing early and consistently can increase the value of the HSA, enabling you to set aside money to cover healthcare costs in the future.

No "Use-It-or-Lose-It" rule

Unlike flexible spending accounts (FSAs), HSA funds do not expire at the end of the year. Unused balances roll over indefinitely, giving account holders flexibility to decide when and how to use their savings, plan for future healthcare needs and build a financial cushion for emergencies.² This enables individuals to plan for long-term health care expenses.

Portability for life changes

An HSA account offers portability, meaning the account remains with you even if you change jobs, switch health plans, or retire. This is a crucial feature, as other employer-sponsored benefits, such as FSAs or retirement health savings plans, may not offer the same flexibility.

Since the account belongs to the individual, HSA savings and investments are accessible even if you change employers.

Retirement healthcare savings

HSAs offer a dual-purpose benefit by serving both as a healthcare savings tool and a retirement planning vehicle. After age 65, HSA funds can be used for non-medical expenses without penalties, though withdrawals will be taxed as ordinary income.

This feature allows individuals to treat the HSA as an additional retirement fund. It can be used to save for medical costs while working, and once they retire, the funds can either continue to cover healthcare expenses or supplement other retirement income sources.

HSA contribution limits and guidelines

Understanding HSA contribution limits is crucial for maximizing the benefits of your account. Each year, the IRS sets a cap on how much you can contribute to an HSA. For 2024, the limits are as follows:⁵

• Individual coverage: $4,150
• Family coverage: $8,300
• Catch-up contributions (age 55+): An additional $1,000

To help optimize contributions, consider:

• Spreading contributions evenly throughout the year to avoid last-minute deposits
• Monitoring any annual updates to HSA contribution limits to adjust contributions accordingly
• Avoiding exceeding limits to prevent penalties

Guidance for HSA success

An HSA account offers numerous benefits, including tax-free savings, investment growth, and flexibility in covering healthcare expenses. Whether you're looking to save for immediate medical costs or invest for future healthcare needs, an HSA can be a powerful tool in your financial arsenal.